Editor's Choice Interview Ukrainian macroeconomics

Juliia Nosulko: “The current model of the energy market does not attract investors”

An interview with the head of the Department for Regulatory Policy of DTEK company, Julia Nosulko. She  tells  why Ukraine needs to reform the energy market.

Among the top managers of large companies in Ukraine there are representatives of the weak and beautiful half of humanity, which in terms of professionalism are as capable as men. Julia Nosulko, Head of the Department for Regulatory Policy of DTEK, proves that it is not the sex, but the mind, interest and the desire for change that helps to understand the energy market well as well as   love for home country and a desire to make it better. These feelings have become the catalyst in the initiation of reforms and do not allow to stop, but, on the contrary, make the country do better to not leave the “tails” of the problems unresolved by the predecessors to the future generation.

Julia Nosulko told about the pitfalls of the electricity market reform and why it is necessary to change the rules of the game.

: Now the energy market of Ukraine is preparing for a large-scale reform. And this is not the first changes in the electricity market for the times of Ukraine’s independence. In your opinion, when did the real reform really start?

Ju.Nosulko: We have been reforming the market since 1995. At that time, the initiative came from the Minister of Energy Alexei Sheberstov. He was inspired by how energy works in Europe, in particular, in the UK. Later, the British model was taken as a basis for the Ukrainian market. This was the first step towards the transition to European standards.

  • The reform began with the fact that large power production associations, which united several regions, produced, distributed and supplied electricity were divided. That is, separate generating companies and separate companies were created that distributed electricity and sold it to the end users – regional energy suppliers. This was the first stage.
  • At the second stage, a separate subdivision, Energorynok, was established on the basis of the state enterprise NEK Ukrenergo, which later became a separate enterprise, the operator of the wholesale electricity market. The British consultants and USAID helped the Ukrainians to realize this very first reform.
  • Then the Agreement was signed between members of the Wholesale Electricity Market, signed in autumn 1996 by its members. It still operates now, in 2016 the 20th anniversary of the signing of the Treaty was just fulfilled. And for today the market still functions on the basis of this document.

The model works like this: “Energorynok” is a state enterprise that is a single buyer of all electricity generated in the country and its single vendor for suppliers. The whole flow of electricity and money passes through it and can not bypass in any way. That is, only small producers can sell electricity directly – small stations, this is stipulated in the licenses.

: What are the main disadvantages of the fact that the electricity market is completely controlled by the state?

Ju.Nosulko: The problem is that neither energy companies can influence their activities in the medium and in  long-term perspective, nor consumers can not find a balance of interests with their supplier. If the market were working, there would be very likely no rolling blackouts, which we experienced in 2014. Of course, that in such a situation, the price would grow short-term due to harsh conditions. But these are the laws of the market. This is how the system balances supply and demand.

In 2010, Ukraine joined the European Energy Community. Within the framework of this community and the Association Agreement with the EU, we have been obliged to implement European legislation in the field of electricity. At that time it was the second Energopacket. And the proposed model itself repeated what exists throughout Europe – a liberalized market model. It has never been implemented. In July 2017, the Law of Ukraine “On the Electricity Market” came in force, which initiated the current reform. The basis of the law was laid the Third Energy Package of the European Union.

Europe experienced the opening of the market gradually. First, the largest consumers were produced in the free market, after a certain period – medium ones, and a little later – all, including the population. But in our country the process becomes close  to impossible terms because of shortage of time, therefore it is necessary to open all and at once. Two years have been done for the implementation of the reform in Ukraine, of which 10 months have already passed.

: Tell us more please, how can the Ukrainian energy market change?

Ju.Nosulko: According to the law, it is planned to create several market segments. The first is bilateral agreements: any consumer / supplier can conclude an agreement with any manufacturer, and buy electricity directly. But here you need to consider that electricity is not kWh. Electricity is also a certain schedule, according to which electricity is consumed, both by population and by industrial enterprises, by the sphere of service. Accordingly, when you sign a contract with someone, you do not just agree to buy a certain amount of kilowatt hours per month. You must specify how it will look during the day, at what time you use more electricity, and in what less.

For example, you have concluded a contract for a month, six months or a year. But to forecast the consumption of electricity in such a time interval is quite difficult. Here, the intraday market comes to the rescue (electricity is traded today for today, but three hours in advance) and the market for the day ahead (electricity is sold today for tomorrow, respectively, for each hour). Thus, we can already approach the real consumption that we are planning for ourselves. And finally, the real-time market is a balancing market. Here, in case of failure to comply with the previously announced schedule, deviations in greater or lesser side will have to pay a fine.

: Is there already any criticism of such changes?

Ju.Nosulko: Now many populists say that this reform will bring to the market large consumers who will buy cheap electricity from the state-owned enterprise “Energoatom”, and everyone else will sit with expensive electricity. First, atomic scientists simply can not sell electricity in this way to cover all the needs of the buyer. In particular, to sell to all volunteers the schedule they need.

But there is one more logical point about which everyone is forgetting. And why should nuclear power engineers sell electricity more cheaply? Do not forget that they also have needs for the development of the company. They also experience problems with the outflow of qualified personnel abroad.

: In this case, should the state maintain its control over the market?

Ju.Nosulko: If you look at the European experience, then, despite the liberalization of the market, after all, the state provides some control, for example, there are serious requirements for the openness of data. But how do European institutions work? They work to some extent after the fact, that is, if something happened and the antimonopoly authority sees this situation as a violation, they begin an investigation. If the company actually committed a violation, the result and sanctions will be such that other market participants are unlikely to want to repeat such an experience. That means that they don`t execute inspections every day, but if a violation is committed, then the punishment will be appropriate.

: And yet, are you sure that this reform will settle in?

Ju.Nosulko: That`s a pity that we have been trying to reform for many years, but we will not come to the realization of the reform. When we started the market reform in 1995-1996, I worked in the Regulator (today – National Commission for State Regulation for Energy and Public Utilities).  At that time from all the post-Soviet countries, we were the leader of reforms. And today it is very insulting to realize that we have long lost these leadership positions. In my deep conviction, only the market will be able to form an adequate relationship between the seller and the buyer.

Of course, there is one nuance. There should be mechanisms of control by the state, as we discussed above. Undoubtedly, in any country natural monopolies are controlled. They are regulated more rigidly in terms of tariff formation, precisely because they are monopolists. And the rest of the market should also work according to certain rules, and in parallel with this mechanisms should operate that exclude manipulation. And then everything works good.

: It sounds good and right, but, despite this, the implementation of the reform has been going on for a very long time. In your opinion, why is it so difficult for Ukraine to reform the energy market?

Ju.Nosulko: In my opinion, the most serious problem is the lack of a reform leader. Ideally, if there were one person in the country that structured the entire process. But, unfortunately, we have no such person today. In many countries such reforms are headed by the highest leaders of the state, because these are very global changes, they affect everyone in the country. Therefore, there must be someone who sees the process as a whole, understands the difficulties, understands in what direction more serious efforts are to be applied, has levers of influence on this process.

A simple example: for today in mass media  there is little information that in the near future in the country the energy market will change radically. Few people know what will happen. And it’s very sad. Because such information should be widely available, there must be social advertising. We, as a company, are working in this direction to give our consumers some understanding of what will happen to the market, what can be expected in the long term, what is the experience of reforming in European countries. From the next major changes, I can mention, for example, that in December those regional energy suppliers, which we know, should stop their work in the market and will no longer supply electricity to consumers.

: Does that mean that in 2019  we must come with a new market?

Ju.Nosulko: Yes, but it concerns the retail market, there changes will occur first of all. This year, the concept of the retail market should change in terms of the supplier-client relationship. The competitive wholesale market will start operating next summer.

: Are we on schedule?

Ju.Nosulko: Now we are in time. But there remains one important unclosed question – the situation with the regulator. As is known, the National Commission for State Regulation for Energy and Public Utilities had problems with the quorum. Theoretically, everyone believed that the first contest, which should appoint 5 people, will be completed by May. But it did not happen and today there is no competent regulator. And the bulk of decisions should be made by the Commission.

We try to work, we suggest how to move, recalling that if certain documents are not accepted by a certain moment, we simply will not be able to make the transformation. We need to get new licenses, conclude new contracts, inform consumers, so that they do not have fears that with the disappearance of the power companies, electricity will stop tomorrow. And this is not a fast story.

But we should not say that everything is lost. The process is underway. From the point of view of private market participants, everyone is still trying to build their own processes. But since we are in an adjustable field, we can not take all decisions and settle all the issues ourselves. There should be a very tight dialogue between the regulator and market participants so that consumers will not suffer as a result. If we do not provide this process, everyone in the country can feel the unpleasant consequences. And do not want to be those who are accused of failing reform.

Therefore, you need to work, go further to get the desired results.

: If the electricity market becomes open and transparent, will it be a decisive factor for attracting investments?

Ju.Nosulko: I can not say that all investors will want to invest in this market. But I know that as long as we have the current market model, serious investors will not come. They want to work in understandable conditions, when the rules do not change every day.

Pay attention, where are the private investments in the energy sector? They go in the green energy, because here the law is observed and the scopes of the work is clearly defined. And they are quite stable. Investments in the rest of the energy sector will also come if there are the same clear conditions.

: Does such a difficult situation make you think about moving to another country?

Ju.Nosulko: I absolutely like our country in every point: we have a beautiful country, wonderful, creative people, unfortunately with politics we have worse situation. Perhaps , not so much with politics but with an abundance of populism. Therefore, we just need to act, not to be afraid of changes, and I believe that these changes will lead us to the best.

 

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